Wednesday, April 29, 2009

>Daily Derivatives (ICICI Direct)

Derivative Comments

• The Nifty near month witnessed unwinding in OI to the tune of 5.88 million shares whereas the May series added 5.69 million shares in OI. With the May futures premium almost vanishing and April sliding into a discount of 7.40 points, we infer noteworthy short positions have been formed in Nifty May series. Also the rollovers have picked up from 48% to 61% yesterday. All these suggests closure of long positions in April and build up of fresh shorts in May series

• The put writers who had entered on Monday at 3400 and 3500 levels were forced to exit on Tuesday. 29654 and 24703 contracts got unwound in 3400 and 3500 puts respectively. This indicates that 3400 is no longer a support for the market; rather it may now act as a resistance since 15234 contracts got added in this call option along with stupendous rise in volume and drop in IV. Call writing was also seen in 3500 call which added 10024 contracts in OI. Moreover, the 3300 call added 21258 contracts indicating some call writers were also active at this strike price. However, the 3300 put which added 5201 contracts in OI also showed signs of put writing. This further suggests that the expiry may be somewhere close to the 3300 mark

• FII Index futures depicted closure of long positions to the tune of Rs 796 crores along with a drop in OI by 2.60%.

To see full report: DERIVATIVES 290409

>Daily Calls (ICICI Direct)

Sensex: We said, "upper shadow is indicating profit-booking ... see if can hold Monday's low of 11176. Positive if it does, else Green support line can be tested." Index couldn't hold 11176, as a result of which, it lost over 3% and tested the Green support line as suspected. Realty/Metals/Banks lost more, about 5%. A/D worsened to 1:9.

The action formed a Belt Hold Line Bear candle, which is bearish if selling continues below its low at 10961. Such an action would open downsides testing previous crucial support near 10719. On the other hand, protecting its low can appear as an attempt to hold the 31-day long Green support line.

To see full report: CALLS 290409

>Daily Market & Technical Outlook (ICICI Direct)

Key points
􀂃 Market outlook — Open flat to positive, Asian markets mixed
􀂃 Positive — Rupee likely to rise
􀂃 Negative — FIIs & MFs Selling

Market outlook

􀂃 Indian markets are likely to open flat to positive, taking cues from the global markets. SGX Nifty was trading 20 points up in the morning. Other Asian markets were mixed in the morning trade as stocks were on shaky ground as concerns over US bank balance sheets and fears over the spread of swine flu persisted. US stocks fell on Tuesday as fresh worries that major banks may need to raise more money offset more reassuring data that suggested the worst may be over for the US economy. Rupee is likely to rise on Wednesday, after a two-day fall, as it gets a boost from gains in Asian stock markets and the dollar's
weakness against some currencies.

􀂃 The Sensex has supports at 10960 and 10720 and resistances at 11210 and 11330. The Nifty has supports at 3350 and 3300 and resistances at 3420 and 3460.

􀂃 Asian stocks mixed, as concerns over US bank balance sheets and fears over the spread of swine flu persisted. Hang Seng rose 195.6 points, or 1.3%, to trade at 14,750.7.

􀂃 US stocks fell on Tuesday as fresh worries that major banks may need to raise more money offset more reassuring economic data that suggested the worst may be over and a big dividend boost from IBM. The Dow Jones slipped 8.05 points, or 0.10 %, to 8,016.95. The S&P 500 dropped 2.35 points, or 0.27 %, to 855.16. The Nasdaq declined 5.60 points, or 0.33 %, to 1,673.81.

􀂃 Stocks in news: RIL, Britannia Industries, Dr. Reddy’s Lab.

To see full report: OPENING BELL 290409


A radical estimate of the bank losses

International institutions regularly publish enormous estimates of banks’ non-provisioned losses: recently USD 2,200 bn or even USD 4,000 bn.

It is well known that these estimates make no sense, because they are based on the market value (actual or supposed) of assets whose market prices are meaningless, and which will be kept by the banks.

However, we can carry out a radical estimate of the bank losses by starting off with the assets held by banks and applying market prices to these assets.

Our maximum estimate of the banks’ loss (in the United States, the euro zone and the United Kingdom), nonprovisioned on assets other than loans to households and non-financial companies, is USD 1,240 bn, markedly less than the figures provided by international institutions.

What losses for the banks?

The banks (we look at the situation of US and European banks) have already significantly written down the portfolios of assets held (Table 1 in Appendix).

But international institutions (IMF, OECD) continue to publish enormous estimates of the bank’s non-provisioned losses: USD 2,200 bn, even USD 4,000 bn recently.

It is well known that these estimates are meaningless. The market prices of numerous assets have been extremely depreciated and are far below the value at which these assets
will eventually be repaid.

But we will try to reconstitute them in a simple manner by looking at the losses - at market prices - realised by the banks on their asset portfolios. Given this method, we are of course
talking about a radical and excessive assessment of bank losses.

Banks' balance sheets

We look at banks' balance sheets in the United States, the United Kingdom, and the euro zone.

On the asset side of the banks’ balance sheets we find:

− loans,

− liquidity and monetary assets, on which there are no capital losses,
− other assets: equities, government bonds, corporate and financial bonds (which includes Agency bonds, ABS, structured credit, etc.).

To see full report: SPECIAL REPORT

>Reliance Industries & Reliance Petroleum (HSBC)

Downgrade to N(V) while raising targets: Growth priced in

■ Following the completion of key projects in FY10, we expect RIL to refocus on new E&P development and exploration; raise our E&P valuation to INR920/share (INR661)

■ A 56% increase in RIL’s stock price since March has closed its alpha with Sensex that grew 39%

■ Raise our targets to INR1,945 (INR1,640) for RIL and INR122 (INR102) for RPL, but downgrade both to N(V) from OW(V)

E&P upside key to valuation
RIL plans to complete three key projects in FY10, resulting in 77% growth in our FY09-11e EPS estimates. We now expect RIL to focus on new E&P development projects and exploration. Recognising the E&P projects pipeline and potential resources in RIL’s E&P portfolio, we increase our valuation of the E&P business to INR920/share (INR661). In our valuation, we have considered 20tcf (12tcf) of 2P reserves, resources from the KG D6 block, and the potential for the ramp-up of gas production to 120MMcmd owing to satellite discoveries. With exploration regaining priority, we also take into account 1,500MMbbloe of additional risked prospective resources at a valuation multiple of USD2/bbloe. RIL’s partners, Niko Resources and Hardy Oil, suggest healthy potential for the KG D9 and Mahanadi D4 blocks, respectively.

RIL’s recent run-up closes its alpha with Sensex
RIL’s 17% outperformance against Sensex since March 2009 has closed the valuation gap between the two. At the current price, the stock trades at a FY11e PE of 10.6x. While the news flow on project ramp-up is likely to be positive over FY10, changes in the valuation band are dependent on the execution of the next set of growth projects and discovering new resources, in our view. We expect focus on these to be back-ended in FY10, with existing projects being a priority.

RIL and RPL: Downgrade to N(V) from OV(W)
We cut our FY10e estimates for RPL by 4.5% and for RIL by 3.1% due to the flow-through effect of the FY09 actuals and a slower start of the second crude unit than our earlier expectations. We raise our target price for RIL to INR1,945 (INR1,640) mainly due to our higher E&P valuation. Based on a swap ratio of 1:16, we raise our target price for RPL to INR122 (INR102).

To see full report: RIL & RPL


Q4 FY09 Result
Sesa Goa has announced its fourth quarter results and it was in line with our expectations. The company’s consolidated Q4 FY09 net sales were down 14.9% yoy at Rs 14299 mn versus Rs 16813 mn and its net profit was down 32.5% yoy at Rs 5476 mn versus Rs 8116 mn. The OPM for the quarter was at 52.7% versus 72.4%.

Volume remains flat
Iron ore volumes for Q4FY09 remained flat yoy at 5 million tones because of sudden fall in demand from China in the last five months, however for the full year company saw 22% growth in volumes despite difficult market conditions. The company also saw an improvement in the inventory situation in February‐March 2009. The company is looking at 20‐25% volume growth for FY10.

Realisation comes down
Realisations were lower in last quarter due to weak iron ore prices, iron ore prices have fallen more than 50% since October 2008 however depreciating Indian rupee partially offset the negatives. The benefit of Rs 200/ tonne from abolition of 8% export duty on iron ore fines since Dec’08 was also passed on to customers.

Increase in reserves, exploration going on
Exploration and drilling programme in Karnataka and Goa have yielded gross additions of 54 million tonnes and after considering mined output of 16 million tonnes during the year from all mines, a net addition of 38 million tonnes. Reserves and resources as on 31 March 2009 were 240 million tonnes compared with 202 million tonnes at the end of FY 2008.
Additional 500 mt of iron ore reserves would be added over next 2‐3 years.

We believe that the demand for steel and iron ore will start improving from September onwards, however realizations for FY10 will be lower than FY09. According to us the company is likely to see 15% increase in sales volume for FY10, and the average realization for the year will remain between USD 45 to 50 per tonne, depreciation in Indian rupee against USD will compensate to some extent for the fall in realisations. As the company exports two third of its production to china, the improvement min demand for steel and iron ore in china will act as a catalyst, also any rise in iron ore prices in the second half of the year will benefit the company because the company sells 80% of its produce in the spot market. We have valued Sesa Goa on EV/EBITDA basis, giving a target EV/ EBITDA of 3 and recommend a accumulate rating for the stock with a target price of Rs 131.

To see full report: SESA GOA

>Corporation Bank (CITI)

Sell: 4Q09 Results – Quantity, Not Quality

Profits up 26%, above estimates; but qualitatively not so sound — Prima facie Corp Bank's results were good – up 26%yoy, 37% ahead of estimates – driven by bond gains, core fee momentum and moderation in costs. However, beneath the surface there are clear signs of pressure - declining margins, sharp rise in restructured loans and lower loan loss charges, despite the large trading gains.

Asset quality: Restructuring stress — Reported NPLs still look good (1.15% NPLs, 75% coverage); however, it masks underlying stress - 2% of loans restructured, another 3% pending. This is ahead of peers and management has missed an opportunity to provide more (utilizing the large bond gains). We expect higher lapses to NPLs given its mid-scale and mid-market franchise.

Growth: Accelerating but appears unsustainable — 4Q09 has seen growth accelerating (8% QoQ loan growth; 20% deposits), but comes at a cost (NIMs down 40bps QoQ). Sharp improvement in CASA ratio (31% vs. 25% in 3Q09) results from 100% QoQ rise in current account balances, suggesting it could be temporary; and possible unwind will pressure growth.

P&L: Trading boost and fee momentum; but margins disappoint — Bond gains, (5x rise, likely profit taking on HTM book), cost moderation (-20% QoQ) and healthy rise in core fees (+28% YoY) were key profit drivers. Core operating profits were up a more modest 7% YoY. NIMs were the key disappointment (down 40bps QoQ) and are now among the lowest in the industry.

Risks remain high, maintain sell — We adjust earnings (+3-4% for FY10-11E) to factor in above estimates FY09 earnings; retain Sell (3H) due to Corp Bank's rising profile with our EVA-based Rs175 target price.

To see full report: CORPORATION BANK

>United Spirits (IDFC SSKI)

Tracking the market momentum, recovering from the knee jerk reaction post the poor financial performance in Q3FY09 and triggered by the ongoing talks with Diageo for stake sale in United Spirits (USL), USL’s stock is up by ~70% from the bottom. However, at the CMP of Rs730 and trading at a valuation of 16x (net of treasury stock), we see a strong trading ‘short’ opportunity given the pressure on near term profitability (rising prices of molasses) and continued uncertainty over the ‘stake sale’ transaction. While USL’s growth momentum remains robust (sold 90m cases - 88.5m cases in USL and 1.5m cases of W&M in FY09 – 20% growth), we see increasing pressure on the near term profitability as molasses prices are set to stay over Rs5200/ ton (25% higher yoy), less likelihood of material price hikes (given the election period) and limited scope for portfolio uptrade (first line brands account for 93% of the business now). We see continued gross margin erosion in USL’s domestic business in FY10 (expect 200bp). Globally too prices of Scotch whisky could see correction as economic recession hits consumption, thereby limiting the upside gains for W&M as and when the contracts come for renegotiation. Besides operationally, there could be likely GBP5-10m risk on numbers on account of pension scheme provisioning in FY09. All these factors pose a risk to our earnings estimates in FY10. Also, while USL is in talks with Diageo and various private equity players for stake sale, there could be likely delay in the completion of the transaction. Citing all these risks, maintain our Neutral stance on the stock with a near term trading ‘short’ opportunity. Global liquor majors – Diageo and Pernod Ricard have seen 20-25% correction in their stock price since December 2008 (while broader markets have moved up) and are trading at PER of 11x.

USL – 70% up from the bottom
After the dismal performance in Q3FY09 (860bp of margin contraction), USL’s stock had corrected to Rs425 in January 2009. However the stock has since then seen 70% uptick to current market price of Rs730. This was driven on three counts – the fall, we believe, was sharper than expected and was a knee jerk reaction to the dismal performance (margins below 12% after a span of 7 quarters) and hence the recovery, secondly on account of strong market momentum (25% from the bottom) as indeed the ongoing talks of stake sale to Diageo and deleveraged the company balance sheet (net debt of Rs61bn).

While Q4FY09 numbers expected to be better than Q3FY09…
In Q3FY09, United Spirits saw the sharpest of the margin contraction for the past many years – EBITDA margin contraction of 860bp and gross margin contraction of 940bp. This was primarily on account of sharp increase in molasses and ENA prices (accounting for 40% of material cost) and glass prices. Effective molasses prices had increased from Rs290/quintal in Q3FY08 and Rs460/quintal in Q2FY09 to Rs525/quintal in Q4FY09 (80% higher yoy and 14% higher qoq). ENA prices too were higher by 50% yoy at Rs31/ltr. With cut down in sugarcane cultivation, molasses and ENA prices have remained higher. However, the scenario improved in Q4FY09 (effective molasses prices were down to Rs480/quintal and ENA prices were at Rs28/ltr in Jan-Feb 2009), with slow down in economy resulting in slow down in ENA and molasses consumption for industrial purpose. This, we believe would help improve upon the margins in Q4FY09 over Q3FY09. While the sales growth remains robust (expect 17% growth yoy), EBITDA margins are expected at 14.4% (310bp higher qoq, but 340bp lower yoy).

To see full report: UNITED SPIRITS


Buy: 4Q Results – Cannot Pick a Hole in the Quarter

Profits up 34% yoy; qualitative reinforcement — Qualitatively, the quarter was ahead, while quantitatively (i.e. net profit), it was just a little behind. The key takeaway is that HDBK continues to stand out in the troubled crowd with its asset book holding comfortably, profitability remaining stable and outlook good enough for it to maintain 20%+ loan growth. We believe HDBK is making significant franchise (and market share) gains in these relatively uncertain times – and doing so profitably.

Asset quality: Continues to defy and widens the gap — The pace of deterioration remains stable (comfortably covered by operating profitability). The restructuring phenomenon appears to have passed it by (0.1% of loans), and 20-25% loan growth looks achievable. Mgmt has a cautiously optimistic growth and quality outlook (consistent through Oct-Nov 2008 lows), and its track record for working through the cycle builds. The risks are the economy and the now-rising expectation that HDBK is immune to asset quality issues.

P&L: Fees and costs impress, while trading one-offs provide provisioning cushion — The P&L is fundamentally the upside surprise – fees have accelerated (bolstered by a strong bounce-back in derivative revs), costs are showing signs of moderating (almost a first among peers), and margins continue to hold at 4%+ levels – significant stability in varying interest rate environments. A surprise trading gain (second quarter running now, though) provides the cushion for a provisioning boost, which is otherwise too high for a normal earnings cycle.

Maintain Buy (1L) — While HDBK becomes even more expensive, we find that we cannot pick a hole in its quarter or business strategy, and until that happens, valuations will likely remain high

To see full report: HDFC BANK

>Bharti Airtel (HSBC)

Retain OW (V); Focussing on the last mile

■ Bharti may be considering outsourcing the last-mile
connectivity as per news reports

■ We would view such a move positively, as it should allow Bharti to leverage its investment in fibre assets

■ We retain our Overweight (V) rating and INR786 target price; we expect Q4 (March) results to be lacklustre

News reports suggest that Bharti may consider outsourcing its last-mile connectivity of its broadband operations and enterprise operations. The reports, by the Business Standard, among others, suggest that this will help the company focus on its core competencies, beyond reducing costs of operations. Outsourcing has been a key part of Bharti’s overall strategy; its mobile network has been outsourced to Nokia Siemens and Ericsson and its IT operations to IBM.

Frost & Sullivan, a business research and consulting firm, estimates the Indian enterprise data services market at INR51bn and expects a CAGR of 25.1% for this segment to INR154bn by FY13e. Large enterprise contributes c70% of the total market, and growth of the data market is driven by MPLS/VPN, which is expected to have a market share of nearly 50% in FY12-13.

While there is no official confirmation of the news item, we believe that an outsourcing deal would allow Bharti to boost its capabilities in network integration. In our view, network integrators have assumed significance recently on the back of complications involving sourcing equipment from multiple vendors and equipment interoperability.

We expect Q4 FY09e (March) results will be lacklustre for Bharti as a result of pricing pressures following the RCOM GSM rollout. We estimate Q4 revenues will decline 2% q-o-q. We estimate the EBITDA margin at 40%, compared to 41% in Q3 FY09. Similarly, we expect net income for Q4 to decline 2% sequentially. We retain our Overweight (V) rating on Bharti shares and our INR786 target price.

To see full report: BHARTI AIRTEL